IHTM13060 | Domicile: Finance (No 2) Act 2017 changes: summary of the Inheritance Tax changes

From 6 April 2025, for inheritance tax purposes, domicile is replaced by long-term UK residence and you can find details of these rules at IHTM47000.

Inheritance Tax (IHT) already has deemed domicile rules (IHTM13024). There are three changes to these rules all of which are effective from 6 April 2017:

• a reduction in the number of years of residence in the UK necessary for deemed domicile to apply (IHTM13061)

• a difference to the way the years are counted (IHTM13061) and

• a new category of deemed domicile, the formerly domiciled resident (FDR).

The FDR category applies to individuals born in the UK with a UK domicile of origin, who have acquired another domicile and then become resident in the UK. The new rules will ensure that their foreign property and the property that they settled when they were non-UK domiciled will be within the scope of IHT while the individual is UK resident, as long as they were UK resident in at least 1 of the 2 years prior to the year in which any IHT charge arises. There is more detail on this measure at IHTM13062.

Example

Jason has been resident and domiciled in England throughout his life and leaves the UK permanently on 1 January 2018 to live in Spain.

Under general law he acquires a domicile of choice in Spain.

On 2 January 2021, he makes a gift of £500,000 from his Spanish bank account to trustees of a discretionary settlement in Gibraltar. Ordinarily, as Jason is domiciled in Spain, no transfer of value arises as this would be a gift of excluded property.

Jason had been domiciled outside of the UK for more than 3 calendar years immediately preceding the date of the gift. (IHTA84/267(1)(a))

Jason was resident in the UK for 18 out of the 20 tax years immediately preceding the date of the gift and for at least one of the four tax years ending with the tax year in which the gift was made (IHTA84/267(1)(b))

The chargeable transfer will be caught by the 15 out of 20 rule. If Jason had made the gift on or after the 6 April 2022 neither rule would apply as Jason would not be caught by the deeming provisions of IHTA84/S267

If there is any doubt as to the correct domicile of the transfer or settlor, the case should be forwarded to Technical for further consideration.